Fitch has downgraded Italy’s credit rating to a single notch above “junk”, saying the jump in debt levels resulting from the coronavirus crisis will increase doubts about the sustainability of Rome’s borrowings.
In an unscheduled update on Italy’s creditworthiness, the rating agency said it expects the country’s ratio of debt to gross domestic product to rise by around 20 percentage points this year to 156 per cent, as a surge in spending combines with an 8 per cent contraction in the economy.
“The downgrade reflects the significant impact of the global Covid-19 pandemic on Italy’s economy and the sovereign’s fiscal position,” Fitch said in a statement on Tuesday evening as it moved the country’s rating to BBB-.
“According to our baseline debt dynamics scenario, the [debt] to GDP ratio will only stabilise at this very high level over the medium term, underlining debt sustainability risks.”
The Italian government provided additional information that resulted in a decision that was “different than the original rating committee outcome”, Fitch said, adding that the current crisis had caused it to bring forward its scheduled rating review from July.
Roberto Gualtieri, Italian finance minister, responded to Fitch’s decision by saying that “the fundamentals of Italy’s economy and public finances are solid”.
In a statement reported by Italian newswire Ansa, Mr Gualtieri said the decision did not take into account decisions taken by the EU, its member states or its institutions. “In particular, the strategic orientation of the European Central Bank does not seem to be adequately valued,” he added.
The downgrade comes just days after Italy’s reprieve by Standard & Poor’s on Friday, which held its rating at BBB. Fitch joins Moody’s in rating Italian debt at a single notch above junk. Italy would see its bonds thrown out of widely followed indices if two of the three agencies were to strip it of its coveted investment-grade status, forcing some investors to offload the country’s debt.
Italian bonds, which have rallied since the S&P announcement, could now come under further selling pressure.
Italy’s 10-year yield ended Tuesday at 1.72 per cent, down from a one-month high of more than 2.2 per cent last week. Despite the decline, Rome’s borrowing costs remain well above levels seen at the start of the year as investors worry about a deluge of new debt issuance to fund its response to the pandemic, and the reluctance of other eurozone members to share the financial burden of fighting the crisis.
The ECB has helped to stabilise the sell-off with heavy buying of Italian bonds under its €750bn emergency asset-purchase programme, easing concerns that the eurozone could be headed for a new debt crisis.
Fitch assigned a stable outlook to Italy’s rating, saying the support of the central bank should keep borrowing costs “at very low levels at least over the near term”.
Even so, the downgrade could add pressure on the ECB to signal further stimulus at its policy meeting on Thursday.
Fitch said in its statement: “Downward pressure on the rating could resume if the government does not implement a credible economic growth and fiscal strategy that enhances confidence that general government debt/GDP will be placed on a downward path over time.”
Mike Riddell, a bond fund manager at Allianz Global Investors, said Rome losing its investment-grade credit rating is “a matter of when, not if”.
“Italy’s debt is probably heading to somewhere upwards of 170 per cent of GDP next year,” he said. “These are the kind of levels where you get junked; it doesn’t matter how much of your bonds the central bank is buying.”